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The Week That Broke the Bank for Crypto

 |  March 5, 2023

By Pymnts

Every so often, there’s a seismic week that shakes up crypto.

Scratch that.

Seems like every week, nowadays, is a seismic week that shakes up crypto.

The ecosystem keeps evolving, but in recent days it feels like the evolution is being dictated by flameouts, by crumbling business models, by looming regulations that determine what people and firms cannot do (and are less about what folks can do) when it comes to using digital currencies, holding them, storing them, and whether any of it is really safe.

This time around, Silvergate Capital’s crisis heralds the fact that the link between cryptocurrency and traditional banking is frayed, and perhaps may never be cemented, at least not if regulators have their way.

As we reported here, Silvergate has acknowledged that a spate of bank runs and its efforts to raise liquidity have led to concerns about its very viability. Turns out that offering traditional banking — deposits, mortgages, lending — becomes harder to do when the client firms’ own fortunes depend on volatile cryptocurrencies, which are in turn subject to the great unknowns of regulatory scrutiny.

That regulatory scrutiny is increasingly alighting on Silvergate, yes, but the impacts are going to emanate well beyond the fate of that single company.

Shot Across the Bow

The shot was fired across the bow earlier this year. In a joint statement in January, the Federal Reserve, the Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. warned of the risks of “significant volatility in crypto-asset markets, the effects of which include potential impacts on deposit flows associated with crypto-asset companies” and “contagion risk within the crypto-asset sector resulting from interconnections among certain crypto-asset participants, including through opaque lending, investing, funding, service, and operational arrangements. These interconnections may also present concentration risks for banking organizations with exposures to the crypto-asset sector.”

The best way to shut down those concerns may be to “ring fence” the activities themselves. That means keeping banks away from a full embrace of crypto firms. The crypto companies themselves may be sensing a crackdown coming, or at least are fearful of being able to get access to their holdings. Elsewhere, we noted this week that four crypto-related firms — Coinbase, Circle, Gemini and Paxos — have cut ties with Silvergate.

There are other signs that traditional banking activities are being curtailed by regulators, this time within the investment management realm.

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